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Full text of "Report on condominium development and sales practices, together with additional views: report"

[COMMITTEE PRINT] 



>i -7 



REPORT ON CONDOMINIUM DEVELOPMENT 

AND SALES PRACTICES 

Together With Additi 



REPO 



BY THE 



SUBCOMMITTEE ON GENERAL 

AND RENEGOTIATION 




SIGHT 



OF THE 

COMMITTEE ON BANKING, CURRENCY 

AND HOUSING 
HOUSE OF REPRESENTATIVES 

94th Congress, Second Session 



JULY 1976 



Printed for the use of the Committee on Banking, Currency and Housing 



U.S. GOVERNMENT PRINTING OFFICE 
74-550 WASHINGTON : 1976 



COMMITTEE ON BANKING, CURRENCY AND HOUSING 



HENRY S. REUSS, Wisconsin, Chairman 



ALBERT W. JOHNSON, Pennsylvania 
J. WILLIAM STANTON, Ohio 
GARRY BROWN, Michigan 
CHALMERS P. WYLIE, Ohio 
JOHN H. ROUSSELOT, California 
STEWART B. McKINNEY, Connecticut 
JOHN B. CONLAN, Arizona 
GEORGE HANSEN, Idaho 
RICHARD T. SCHULZE, Pennsylvania 
WILLIS D. GRADISON, Jr., Ohio 
HENRY J. HYDE, Illinois 
RICHARD KELLY, Florida 
CHARLES E. GRASSLEY, Iowa 
MILLICENT FEN WICK, New Jersey 
RON PAUL, Texas 



LEONORK. (MRS. JOHN B.) SULLIVAN, 
Missouri 

THOMAS L. ASHLEY, Ohio 

WILLIAM S. MOORHEAD, Pennsylvania 

ROBERT G. STEPHENS, Jr., Georgia 

FERNAND J. ST GERMAIN, Rhode Island 

HENRY B. GONZALEZ. Texas 

JOSEPH G. MINISH, New Jersey 

FRANK ANNUNZIO, Illinois 

THOMAS M. REES, California 

JAMES M. HANLEY, New York 

PARREN J. MITCHELL, Maryland 

WALTER E. FAUNTROY, 

District of Columbia 
LINDY (MRS. HALE) BOGGS, Louisiana 

STEPHEN L. NEAL. North Carolina 
JERRY M. PATTERSON, California 
JAMES J. BLANCHARD, Michigan 
CARROLL HUBBARD, Jr., Kentucky 
JOHN J. LaFALCE, New York 
GLADYS NOON SPELLMAN, Maryland 
LES AuCOIN, Oregon 
PAUL E. TSONGAS, Massachusetts 
BUTLER DERRICK, South Carolina 
PHILIP H. HAYES, Indiana 
MARK W. HANNAFORD, California 
DAVID W. EVANS, Indiana 
CLIFFORD ALLEN, Tennessee 
NORMAN E. D' AMOURS, New Hampshire 
STANLEY N. LUNDINE, New York 

Paul Nelson, Clerk and Staff Director 
William P. Dixon, General Counsel 
Michael P. Flaherty, Counsel 
Grasty Crews II, Counsel 
Orman S. Fink, Minority Staff Director 
Graham T. Northup, Deputy Minority Staff Director 



Subcommittee on General Oversight and Renegotiation 

JOSEPH G. MINISH, New Jersey, Chairman 
PARREN J. MITCHELL, Maryland GEORGE HANSEN, Idaho 

BUTLER DERRICK, South Carolina JOHN H. ROUSSELOT, California 

PHILIP H. HAYES, Indiana STEWART B. McKINNEY, Connecticut 

HENRY B. GONZALEZ, Texas 
FERNAND J. ST GERMAIN, Rhode Island 
DAVID W. EVANS, Indiana 
STANLEY N. LUNDINE, New York 

Jack Zackin, Counsel 



(II) 



LETTER OF TRANSMITTAL 



July 20, 1976. 

To Members of the Committee on Banking of Currency 

Transmitted herewith for use by the full Banking, Currency and 
Housing Committee and the Congress is a report by the Subcommittee 
on General Oversight and Renegotiation on Condominium Develop- 
ment and Sales Practices. 

The report has been adopted by all of the majority members of the 
Subcommittee and by Congressman McKinney. Congressman Rous- 
selot and Congressman Hansen have chosen to submit additional 
comments. 

Joseph G. Minish, Chairman. 
(in) 



Digitized by the Internet Archive 

in 2013 



http://archive.org/details/condominOOunit 



REPORT ON CONDOMINIUM DEVELOPMENT AND SALES 
PRACTICES TOGETHER WITH ADDITIONAL VIEWS 



L INTRODUCTION' 

Section 821 of the Housing and Community Development Act of 
1974 (P.L. 93-383) reflects Congressional concern with the significant 
implications of the rapidly expanding condominium housing market. 
During the first session of the 94th Congress, the Subcommittee on 
Housing and Community Development requested that the Subcom- 
mittee on General Oversight and Renegotiation of the Committee on 
Banking, Currency and Housing undertake an inquiry into condo- 
minium development and sales practices. Pursuant to this request, the 
Oversight Subeominittee conducted four days of hearings and an 
in-depth staff analysis for the purpose of determining whether federal 
legislation is necessary or advisable to protect condominium purchasers 
and to insure that condominium development keeps pace with the 
nation's housing needs. 

A condominium is defined as an individually owned housing unit 
in a multi-unit project. Condominium purchasers acquire full title 
to their units plus an undivided interest in the project's common areas 
such as the parking lot, recreation facilities, and the land under the 
building. A related type of cluster housing is the planned unit develop- 
ment (PL T D). In a planned unit development, the purchaser acquires 
fee simple ownership of what is typically a single-family home as well 
as the real property beneath it. All other areas of the development are 
owned in common. 

In the past 5 years, condominium development has increased dramat- 
ically — from 85.000 units in 1970 to approximately 1,340,000 units 
today. It is estimated that almost 4 million Americans currently reside 
in condominiums. In 1973 and 1974. HUD estimated that 25 percent 
of all for-sale housing starts were condominiums. The National Asso- 
ciation of Home Builders estimates that condominium starts in 1975 
amounted to 8.1 percent of total private housing production, or 94,082 
units. Projections for 1976 put the condominium share of total starts 
at 9 percent, representing approximately 139.000 condominium units. 

Condominium development. hoAvever, has been a highly regional 
phenomenon. In some areas of the country, therefore, condominium 
starts have constituted a much higher percentage of total housing 
production. HUD estimates that nearly 50 percent of all condominium 
units are located in Florida. California, and Xew York. More than 
70 percent are concentrated in 10 States: Florida, California. Xew 
York, Illinois. Michigan, Pennsylvania, Texas, Xew Jersey, Arizona, 
and Maryland. As might be expected, the majority of condominium 
housing is located in or on the fringes of urban areas, or in resort 
communities. 

The rapid growth of condominium housing can be attributed to 
certain advantages inherent in shared property ownership. From the 

(1) 



2 



purchasers' point of view, condominiums combine some of the best 
attributes of apartment living, such as ease of maintenance and prox- 
imity to urban centers, with the tax advantages and opportunities for 
equity appreciation characteristic of single-family housing. In addi- 
tion, condominiums are less expensive than detached homes, making 
the benefits of property ownership available to a larger share of the 
population. 

Condominiums also offer certain advantages to developers which 
make them attractive alternatives to more traditional investments. 
Rapidly rising costs of land, labor, and materials militate in favor of 
high density, multi-unit housing. These same factors, however, plus 
high real estate taxes and the imposition of rent controls, have signifi- 
cantly diminished potential profits to be reaped from rental housing. 
There are, therefore, great incentives for a developer to turn to con- 
dominium construction where he can realize a quick return on his in- 
vestment, and turn responsibility for running the project over to the 
resident owners. Owners of existing rental projects have similar in- 
ducements to convert their projects into condominiums. 

Certain benefits inherent in condominiums have also become ap- 
parent to local governments. The development of condominiums pre- 
sents one of the only meaningful possibilities of attracting middle- 
income families back into inner city areas. In addition, the conversion 
of rental units into condominiums provides the possibility of neigh- 
borhood rehabilitation and the increased stability and maintenance 
which traditionally attends home ownership. 

II. Findings axd Conclusions 

a. consumer problems 

Despite the potential benefits of condominium development, the con- 
dominium boom has been accompanied by a number of consumer prob- 
lems and developer abuses. On February 18 and 19, the Subcommittee 
on General Oversight and Renegotiation heard testimony from con- 
dominium consumer advocates and spokesmen for developers. On May 
19. 1976, Housing and Urban Development Secretary. Carla Hills 
reported on the findings of the HUD Condominium/Cooperative 
Study. The Subcommittee also held hearings on May 22 in Hallandale. 
Florida and obtained the views of numerous condominium owners and 
several major developers. The Subcommittee found the following prob- 
lems to be those generally considered most significant : 

1. A recreation lease is a device by which the developer of a condominium 
project retains title to a project's recreation facilities, such as the swimming: pool 
or a card room, and leases these facilities to the unit owners. Such leases are 
usually for 99-year periods and contain escalation clauses which provide for auto- 
matic adjustments in rent, based on increases in the cost of living. In almost all 
cases where they exist, execution of the recreation lease is a prerequisite to the 
purchase of an individual apartment. A purchaser cannot, therefore, purchase an 
apartment but decline signing the recreation lease and forego use of the recrea- 
tion facilities. The subcommittee found that long-term recreation leases are the 
greatest complaint of dissatisfied condominium owners in Florida. 

2. Understandably, condominium purchasers expect their housing to be of better 
quality than a rental apartment, since the purchase of a condominium involves 
a major investment. Condominium owners, however, report that poor construc- 
tion quality is a major grievance. Faulty construction poses particular problems 
to condominium purchasers since it is virtually impossible to conduct an ade- 



3 



quate inspection of a project's structural systems. In addition, construction de- 
fects in condominiums are difficult to remedy because of the requirement that a 
majority of owners must agree to make repairs. The problem of faulty construc- 
tion is further exacerbated by the fact that many developers do not provide any 
warranties on a building's major structural systems. 

3. Because the legal relationships flowing from condominium ownership are 
complex, the legal documentation required for the creation of a condominium 
frequently exceeds several hundred pages. The language of the documents is so 
difficult to understand that it is generally beyond the comprehension of the 
average layman. Purchasers, therefore, often do not fully understand their rights 
and responsibilities until problems arise and hidden obligations become clear. 

4. A series of difficulties sometimes beset condominium owners after the devel- 
oper turns control of the project over to them. Such problems include improper 
insurance coverage, inadequate budgeting, unworkable bylaws, and lack of ade- 
quate reserves for major repairs and replacements. In general, these problems 
result from lack of proper management. 

5. Some condominum problems arise from the close-quarter living inherent in 
condominium ownership. Concerns such as the problem of pets and neighbors 
with divergent lifestyles, for example, are often cited by condominium owners as 
sources of dissatisfaction. 

6. For a variety of reasons, including underfinancing and the general recession, 
many condominium developers have gone bankrupt in the past several years. In 
some cases these bankrupt developers had been commingling purchaser deposits 
with general construction funds. Following the developer's bankruptcy, pur- 
chasers have been unable to recover their deposits. 

7. A widely reported problem is developer misrepresentation of the apartment 
owners' future maintenance costs. Whether intentional or inadvertent, when this 
practice occurs purchasers find themselves saddled with expenses far in excess 
of those they anticipated. 

8. Problems are created for unit owners if the developer fails to pay his pro 
rata share of association assessment for completed but unsold units. This gen- 
erally requires the apartment owners to pay larger assessments or face curtailed 
services. 

9. Certain developers are including in their sales contracts a provision which 
obligates the purchaser to utilize unit financing arranged for by the developer in 
return for a (sometimes substantial) ''finders fee". Obviously, this practice in- 
creases the price of the unit and prevents the purchaser from attempting to obtain 
the best possible financing arrangements. 

10. The refusal of developers to turn control of a project over to the resident 
owners within a reasonable period of time has been a recurring problem. Aside 
from depriving the unit owners of their right to fully control their own property, 
this practice has been cited as leading to several specific abuses. Developers have, 
for example, entered into long-term "sweetheart contracts'' with management 
companies operated by their own subsidiaries. These contracts subject unit 
owners to higher cost and lower quality management than might have been 
obtained if owners were able to select an independent management company. 

11. Many condominium owners have reported that their apartments were not 
ready for occupation on the date promised by the developer. This is a particular 
problem for purchasers who have sold their homes or whose leases have ter- 
minated and have no available alternative housing. 

The Subcommittee believes that a majority of the problems re- 
ported by condominium owners stem directly from the relative new- 
ness of condominium housing. Most purchasers of condominiums 
simply do not possess the requisite knowledge and information to 
enable them to fully understand the implications of condominium 
ownership. Unlike buyers of single family homes or renters of apart- 
ments, who are generally familiar with the product for which they are 
bargaining, condominium buyers may have only the vaguest idea of 
what to look for and expect when purchasing an apartment. While 
there have been some instances of willful developer misrepresentation 
and self-dealing, it is the general lack of consumer information which 
generates the severest problems for condominium owners. 



4 



In her statement to the Subcommittee, Amanda Hyatt, executive 
director of the Georgia Association of Condominium Owners, ad- 
dressed this point : 

The most widespread source of problems encountered by our members is lack of 
education and understanding. Most condominium purchasers . . . are buying a 
condominium for the first time and with very little idea of what it is they are 
buying. They do not understand the obligations and responsibilities arising from 
joint ownership of the common properties nor do they comprehend that they, the 
owners, must operate the [owners'] association. They often do not understand 
exactly what they own individually and what is commonly owned or the restric- 
tions that common ownership imposes. (Hearings p. 358). 

Secretary Hills, in response to a question from Chairman Minish. 
indicated that providing the individual with adequate information 
could solve 95 percent of consumer problems. 

The problem of inadequate information is compounded by the com- 
plexity of the documentation, which deters even those condominium 
purchasers anxious to understand exactly what their purchase entails. 
As Congressman Benjamin Eosenthal told the Subcommittee : 

In addition to their bulk, condominium documents are highly technical in 
nature and extremely difficult to understand. In some cases all documents cover- 
ing the purchase are not even delivered to the buyer until after the purchase has 
been concluded and the contracts for sale signed. Even if the purchaser is given 
adequate time to inspect the documents, their sheer volume and complexity 
makes it difficult for the average layperson or lawyer to understand. Thus, it is 
unlikely that many purchasers — if any — have even a vague notion of the commit- 
ment they are making when they finally sign a contract to purchase a condo- 
minium. (Hearings p. 94). 

It is the Subcommittee's conclusion that disclosure to prospective 
purchasers, in readily understandable language, of all pertinent in- 
formation concerning a particular condominium project would allevi- 
ate many of the problems reported by condominium owners. Such 
information would include conspicuous disclosure of important items 
in the sales contract, such as the existence and terms of recreation leases 
and management contracts, and the extent and duration of the devel- 
oper's control over the unit owners' association. 

Even complete and conspicuous disclosure, however, would not al- 
leviate all the consumer problems. Disclosure must be supplemented 
by educational programs to acquaint consumers with the basic facts 
concerning condominium ownership and to point out the key features 
to look for when purchasing. 

Education, moreover, should not be limited to the consumer. The 
subcommittee agrees with Secretarv Hills, who stated : 

A better informed public, more knowledgeable developers and better trained 
property managers can eliminate many of the problems and abuses we have iden- 
tified. (Hearings p. 202). 

Through its Office of Consumer Affairs and Regulatory Functions, 
HUD is currently engaged in an attempt to educate all parties con- 
cerned with condominium living, and has published a series of booklets 
for this purpose. The Subcommittee believes that a comprehensive pro- 
gram of education is one of the most important measures HUD can 
take to assure consumer satisfaction and a healthy condominium 
market. 

As the figures cited above indicate, condominium development lias 
slowed from its extremely rapid pace in the early 1970s. In part, this 
slowdown is due to the general recession. Well publicized consumer 



5 



complaints have, no doubt, also played a part in the construction slow- 
down. There was, however, general concurrence among the Subcom- 
mittee's witnesses that the factors which originally generated the con- 
dominium boom still exist and that future prospects for condominium 
development are favorable. 

In addition, as Secretary Hills reported, ''Some experts believe that 
a significant amount of construction and conversion activity will take 
place in areas that currently have few condominiums." (Hearings 
p.Q2j4)< 

The subcommittee believes that Congressman Rosenthal was correct 
when he testified : 

The pressure of the problem has subsided at the moment because of the reces- 
sion but it will surely come back. The trend to conversions and the building of 
condominiums of course is enormous. It is like water being heated in a kettle, 
inevitably it is going to boil and that top is going to be blown off. We in Congress 
have to anticipate that event and not let the problem get out of hand. (Hearings 
p. 96). 

B. CONVERSIONS 

Over one hundred thousand rental units have been converted to con- 
dominium ownership since 1970. Perhaps no aspect of condominium 
development has engendered as much controversy as the conversion 
process. The fear has been widely expressed that coiwersions are hav- 
ing a severe impact upon the nation's low-income and elderly citizens, 
since these groups usually cannot afford to purchase their apartments 
and thus face summarv eviction. The chronic scarcity of rental housing: 
in the major urban areas, where most conversions occur, makes it 
difficult or impossible for evicted tenants to obtain comparable or 
alternative housing. Each converted apartment building, moreover, 
exacerbates the rental housing shortage by further decreasing the stock 
of rental apartments. 

For these reasons, the Oversight Subcommittee considered the con- 
dominium conversion process to be worthy of comprehensive study. 
On February 19, the Subcommittee heard from a panel of four experts 
on the conversion process : Dr. George Sternlieb of Rutgers University. 
Arthur S. Levine. Assistant Attorney General of the State of Xew 
York, and David H. Marlin and Erica "Wood of the National Council 
of Senior Citizens. The testimony of these witnesses, coupled with 
that of Secretary Hills, Representative Benjamin Rosenthal, and 
Verona, New Jersey Mayor, Jerome Greco, provided the Subcommit- 
tee with an extensive factual background from which to analyze the 
causes and effects of condominium conversion. 

The sharp rise in the cost of operating an apartment building, the 
prime location of converted buildings, and the purchasers' opportuni- 
ties for equity appreciation have all contributed to the conversion 
phenomenon. It appears, however, that two governmental policies have 
provided the major impetus for the conversion of rental units. The 
promulgation of municipal rent control ordinances is. perhaps, the 
overriding incentive for apartment owner.- to convert. As Dr. George 
Sternlieb expressed it : 

The imposition of rent controls finds as its natural complement the conversion 
of rental units into condominiums . . . [T]heir imposition makes the ownership 
of rental facilities a more riskfnl. less promising investment. The response i^ an 
attempt to sell out. Since private buyers for the parcel as a whole are faced 



74-550—76 



6 



with the same drah picture as the prospective seller, this is nor a particularly 
promising avenue. . . . 

What is left therefore is the condominium conversion process. Since the build- 
ing now is to be sold among a variety of individuals each of whom becomes 
the owner of his own apartment, the strictures on rent level are irrelevent. . . . 
(Hearings pp. 69-70). 

In addition, prospective purchasers of converted apartments are 
encouraged by the favorable federal income tax treatment afforded 
to homeowners. Dr. Sterrilieb went so far as to lable federal tax policy 
"the principal . . . shaperof the present situation." (Hearings p. 46) . 
Moreover, purchasers' expectations of sizeable tax deductions fre- 
quently furnish the apartment owner an additional incentive to con- 
vert, since thev enable him to secure from individual buvers a higher 
than pre-control price for the total of apartment units in his building. 
Mayor Greco, for example, testified that prices of the individual 
units in a converted project in Verona averaged Zy 2 times the assessed 
valuation. 

In a study of conversions in Washington, D.C. Dr. Sternlieb's 
Center for Urban Policy Research found that converted apartments 
appeal primarily to young, childless couples, and to well-to-do elderly 
families whose children no longer reside at home. Because national 
demographic trends indicate that these households are increasing at 
a far greater rate than the national population as a whole, it appears 
that the condominium conversion process will remain a significant 
factor in the nation's housing picture for the foreseeable future. 

All of the Subcommittee's witnesses agreed that it is the nation's 
elderlv citizens who are most severelv affected bv the conversion proc- 
ess. Living on fixed incomes, many older people are not financially 
able to purchase their apartments. Moreover, it is often difficult for 
the elderly to arrange for mortgages, and many simply believe them- 
selves too old to take on the responsibilities of home ownership. The 
problems of the elderly are compounded by the fact that many of them 
reside in well-constructed, well-located buildings wdiich are prime 
targets for conversion. 

The Center for Urban Policy Research found that, in the District 
of Columbia, the principal family compelled to move from a con- 
verted building is an elderly household with a head whose median age 
is over 60 years. The median income of such households approaches 
ss.500. with the largest concentration below $10,000. While this 
family's rent typically represented 25.7 percent of income, the con- 
dominium changeover would have increased housing costs to almost 
53 percent of income. In response to a question from Mr. McKinney. 
Dr. Sternlieb indicated that the Center's findings concernino- Wa>h- 
ington. D.C. were equally valid for all major urban areas. 

Similarlv. in its studv of conversions in Washington. D.C. the 
National Council of Senior Citizens found that 54 percent of those 
who moved from converted buildings were aged 60 or over, while 45 
percent had incomes under $10,000. Altogether. 32 percent were found 
to be low and moderate income renters. 

While our witnesses concurred that conversion forces the elderly 
out of their apartments, there was considerable disagreement over 
the ability of evicted senior citizens to locate new rental units com- 
parable to their former apartments. Dr. Sternlieb reported: 



7 



Their new unit had a median rent of $182 monthly. Interestingly enough, this 
is exactly the same median total that prevailed in the unit which underwent 
condominium conversion. While the move itself represents some degree of hard- 
ship . . . there is little evidence to suggest that the market was not able to 
absorb the move-outs at rents comparable to those charged before the condo- 
minium conversion occurred. Moreover, they shifted to units comparable in size 
and quality to those vacated, and most of these were still in the city . . . 
(Hearings pp. 56 and 60) . 

David Marlin, on the other hand, reported that the National Coun- 
cil of Senior Citizens* study found that 72 percent of low and middle 
income elderly experienced a 20 percent or greater increase in rent as 
they moved to their new locations. The X.C.S.C. study also indicated 
that 23 percent of the evicted tenants took four months or longer to 
find substitute housing. 

Secretary Hills testified that an average of only 20 percent of rental 
tenants purchase their apartments when a building is converted. She 
also reported that, "Those who do move often find it difficult to find 
substitute housing, especially in areas where the available supply of 
suitable housing is inadequate or too expensive." 

Economic factors aside, all of the witnesses expressed a belief that 
the social and psychological impact of conversion on the elderly is 
severe indeed. Uprooted from neighborhoods in which they have 
typically resided for many years, forced to leave old friends and old 
memories, the elderly find it extremely difficult to adjust to their new 
situation. The very process of apartment hunting may. in fact, prove 
extremely taxing. These conclusions are borne out by the X.C.S.C. 
study. As explained by Erica Wood : 

The study also focused on social and psychological costs of moving for these 
elderly persons: 92 percent responded that they had a harder time seeing their 
families : 81 percent responded they had a harder time getting to church : and 
71 percent had a harder time getting to the doctor. 

Moreover. Mr. Chairman. 45 percent reported ill health effects from the move : 
More particularly, anxiety and great depression. (Hearings p. 40). 

On the other hand, the Subcommittee found that the conversion 
process offers significant benefits to the jurisdictions in which it is 
occurring. The conversion of quality buildings in prime locations 
presents a viable method by Avhich cities can reverse the exodus of 
middle class residents. Municipalities also benefit from the increased 
assessments on converted parcels. As Dr. Sternlieb testified : 

From Washington's point of view, if you take all of the conversions that have 
taken place, what you have is about a 100-percent increase in the tax base on 
sites. You have a doubling of your base with no particular increment in the 
municipal expenditures required. (Hearings p. 88). 

The conversion of rental apartments into condominiums presents a 
classic instance of competing values and interests. As pointed out. the 
conversion process can have severe repercussions for elderly citizens 
forced to move from long-established residences. Balanced against 
society's interest in protecting the elderly, however, is the potential 
benefit inherent in the ability of the conversion process to improve 
the fiscal position of the nation's cities, through up-graded assess- 
ments and the in-migration of middle and upper-class households. 

It is the sense of the Subcommittee that the responsibility for bal- 
ancing these competing interests properly resides with the jurisdic- 
tions directly affected by the conversion process. It would big both 



s 



unfair and unwise for the federal government to inhibit the conversion 
process in financially-strapped communities that believe that the over- 
all economic benefits justify the social costs of conversion. 

It is also apparent that communities sinking the balance in favor 
of tenant protection have acted or are acting to reduce the threat of 
eviction. New York State and San Francisco, California, for example, 
have enacted a requirement that 35 percent of the tenants in a building 
must agree to purchase apartments before conversion can take place. 
Palo Alto and Marin County, California have enacted ordinances 
linking the right to convert to their community's rental vacancy rate. 

In his testimony before the Subcommittee, Arthur Levine indi- 
cated an additional objection to federal action : 

I might also point out this, namely, that conditions in New York City or the 
urban areas like New York City may be different than conditions elsewhere. And 
you just cannot tailor a national law that will fit every situation throughout the 
land. And you just cannot tailor a law that will fit each and every economic 
class. (Hearings p. 90). 

C. THE CURRENT FEDERAL ROLE 

HUD's Office of Interstate Land Sales Registration (OILSR), the 
Federal Trade Commission, and the Securities and Exchange Com- 
mission are the three federal agencies currently involved in the ad- 
ministration of condominium development and sales. In order to learn 
the details of these agencies' condominium related activities, and to 
assess the potential interaction between these activities and a compre- 
hensive scheme of federal regulation, the Subcommittee on General 
Oversight and Renegotiation requested the views of Secretary Hills 
on the activities of OILSR, and solicited testimony from James De- 
Long, Assistant Director of Special Projects, Bureau of Consumer 
Protection, Federal Trade Commission, and two witnesses from the 
Securities and Exchange Commission, Richard H. Rowe, Director of 
the Division of Corporation Finance and Paul Gonson, Associate 
General Counsel. 

1. Office of Interstate Land Sales Registration 

The Office of Interstate Land Sales Registration administers the 
Interstate Land Sales Full Disclosure Act. The Act applies to the sale 
or lease of 50 or more lots of real property through the mails or other 
instruments of interstate commerce. Regulations have subjected con- 
dominiums to the Act since 1969. A condominium project is considered 
as a subdivision, with each unit being a lot. The Act, however, ex- 
empts sales of completed units or units sold under a contract requiring 
completion within two years. As Secretary Hills explained, these ex- 
emptions exclude most condominium projects from the requirements 
of the statute : 

With respect to condominiums intended as primary residences in metropolitan 
areas, registration is generally unnecessary since most professional huilders are 
a hie to deliver a completed unit to a purchaser within two years after the 
contract of sale has been signed. (Hearings pp. 223-224). 

2- Federal Trade Commission 

The staff of the Federal Trade Commission is currently conducting 
an investigation of condominium sales practices. The investigation 



9 



is focusing on possible violations of Section 5 of the Federal Trade 
Commission Act which prohibits unfair or deceptive trade practices. 
James DeLong explained to the Subcommittee : 

During the investigation the general philosophy of the staff has been that 
the best use of FTC resources would be in connection with problems of long term 
management contracts and recreation leases, especially when consumers are 
locked into such agreements as the result of contracts entered in the past. . . . 
To obtain consumer redress we must be able to show a Federal District Court 
that the practices for which redress is sought were fraudulent or dishonest. 
While the Commission itself can issue cease and desist orders against practices 
which are simply unfair and deceptive the higher standard must be met if redress 
is to be obtained. (Hearings p. 258). 

Mr. DeLong reported that the staff planned to make recommenda- 
tions to the Commission in the near future. 

In addition to its authority to commence litigation, the FTC is 
empowered to issue regulations to prevent future unfair and deceptive 
practices. In response to a question from Mr. Evans, Mr. DeLong 
explained : 

When the investigation started, both of these possibilities were certainly 
open. After Congress introduced bills last year, we felt we should concentrate 
on this other area of the problems of the past because we felt that Congress 
might well be enacting legislation in this area and that it would be foolish for 
us to get into rule-making when legislation was in process. . . . We are not pro- 
ceeding in that direction, but it is an open possibility. (Hearings p. 261). 

Several consumer spokesmen have also suggested that long-term 
recreation leases constitute "tie-in"' sales and are therefore in violation 
of the anti-trust laws. Mr. DeLong indicated that FTC action based 
on this theory has not been precluded. It seems clear, however, that 
the Federal Trade Commission staff, at least for the time being, is 
concentrating on seeking to redress abuses of management contracts 
and recreation leases through Section 5 of the Federal Trade Com- 
mission Act. 

3. Securities and Exchange Commission 

If a condominium is offered and sold as a "security", as that term 
is defined in the federal securities laws, it is subject to regulation by 
the Securities and Exchange Commission. Although the line is some- 
what unclear, the Commission will generally consider a condominium 
to be a security when, as Richard Rowe explained. "'The facts suggest 
that the purchaser is investing in a business enterprise, the return 
from which will be substantially dependent on the success of the 
managerial efforts of other specified persons.*' 

In 1973, the Commission issued Securities Act Release No. 5347, 
which specifies that condominiums will be considered "securities'" in 
any of the following circumstances: 

1. The condominiums, with any rental arrangement or other similar service, 
are offered and sold with emphasis on the economic benefits to the purchaser 
to be derived from the managerial efforts of the promoter, or a third party 
designated or arranged for by the promoter, from rental of the units ; 

2. Participation is offered in a rental pool arrangement ; 

3. A rental or similar arrangement is offered whereby the purchaser must 
hold his unit available for rental for any part of the year, must use an exclusive 
rental agent or is otherwise materially restricted in his occupancy or rental of 
his unit. 

If SEC determines that a condominium constitutes a security, the 
developer is required to compty with the Securities Act of 193*3 and 



10 



the Securities and Exchange Act of 1984. The 1933 Act is basically 
a disclosure statute, requiring the offeror to register and have declared 
effective a registration statement containing full and fair disclosure 
relating to the project. Until SEC declares the statement effective, 
the developer cannot accept any funds nor consummate any sales. 

The Securities and Exchange Act of 1934 regulates individuals in 
the business of selling securities, and may require a developer to 
register his salesmen as securities broker/dealers, or find registered 
broker/dealers to sell units in his projects. Probably the most serious 
consequence of having to register salesmen as broker/dealers is the 
application of the margin requirements of the Federal Reserve Board ? s 
Regulation T. These requirements prohibit assigning a value to a 
security for purposes of using it as collateral unless the security is 
listed on an exchange or a special margin list. Under the regulations, 
therefore, broker/dealers selling condominium units cannot partic- 
ipate in an offering where the developer has himself extended or ar- 
ranged for financing. This interpretation of Regulation T makes it 
very difficult to arrange mortgages for investment condominiums. The 
Commission and the Federal Reserve Board, apparently in response 
to this problem, promulgated regulations last year exempting certain 
condominiums from the operation of Regulation T. 

Registration with the SEC is a costly and time consuming process. 
Richard Rowe estimated that the process may take from a month to 
a year, and cost between $50,000 and $100,000. Only 88 projects have 
been registered since 1967, a number considered by SEC to be only 
a small portion of those required to register under the regulations. 
In response to a question from Mr. McKinney, Mr. Rowe indicated 
that the failure of developers to file is probably due to their ignorance 
of the application of the securities laws to investment condominiums. 

In his testimony, Mr. Rowe frankly admitted that constraints on 
time and manpower have prevented the Commission from devoting 
the resources necessary to make developers aware of their obligations 
under the securities laws, and to insure that these obligations are met. 
He also admitted that SEC's disclosure and broker/dealer registra- 
tion programs might be considered by some to be unduly costly and 
time consuming when applied to less-conventional investment vehicles 
such as condominiums. 

Based on these considerations, SEC indicated that they would not 
necessarily object to the enactment of a comprehensive federal con- 
dominium disclosure and regulatory statute which would be adminis- 
tered by another agency. They did stress, however, that their support 
of such legislation would depend on their assessment of whether it 
provided sufficient protection for investors. As Mr. Rowe put it : 

We believe, however, that in formulating such legislation, the Subcommittee 
should bear in mind that there may be significant differences between the kind of 
regulation or disclosure that should be required for residential, urban con- 
dominiums, on the one hand, and the disclosure that would be appropriate for 
''investment'" condominiums such as certain resort or commercial projects. Unless 
new legislation were specifically directed to the problem of investment as opposed 
to residential condominiums, it would, in our view, be important to retain exist- 
ing Commission jurisdiction over condominiums which come within the definition 
of a security in order to assure that such securities, like other investment vehicles, 
are subject to disclosure and other requirements of the federal securities laws. 
(Hearings p. 272) . 



11 



D. GOVERNMENT SPONSORED FINANCING MECHANISMS 

1. HUD/FIIA Condominium Mortgage Insurance 

Section 234 of the National Housing Act authorizes HUD/FHA to 
insure condominium mortgages. Under Section 234(d), FHA insures 
"project mortgages" to finance the construction or rehabilitation of 
condominium housing developments. When construction has been com- 
pleted and individual units are sold, the units are released from the 
project mortgage and financed separately. 

A purchaser may finance his unit with FHA Single-Family Unit 
Mortgage Insurance under Section 234(c), if the mortgage does not 
exceed $45,000. Although HUD regulations require that no unit mort- 
gage can be insured until units representing 80 percent of the value of 
the total units in a project have been sold, this requirement can be 
waived if the circumstances warrant. 

HUD/FHA has established stringent quality control standards for 
the projects insured under Section 234. FHA involves itself in such 
projects from their inception, making feasibility analyses of initial 
proposals, reviewing preliminary specifications, and examining com- 
plete architectural drawings and specifications before making a firm 
commitment. 

In addition to supervising the quality of construction, HUD/FHA 
regulates the manner in which a developer may offer units for public 
sale. Before any solicitation can be made, the developer must obtain 
FHA approval of all organizational documents, including manage- 
ment contracts. No language will be permitted in the enabling declara- 
tion that would permit the grantor to retain ownership of the common 
facilities. 

Adequate disclosure to prospective purchasers is assured through 
the requirement that a "subscription and purchase agreement", incor- 
porating essential information about the project, be used in the devel- 
oper's solicitation. A schedule of estimated monthly assessments must 
be attached to the agreement. The sums received on account of the pur- 
chase of all units must be deposited in a special escrow account, under 
an escrow agreement which has been approved by HUD/FHA. 

Since the inception of the Section 234(c) program, FHA has insured 
a total of only 24,174 condominium unit mortgages. Condominium 
units utilizing FHA assistance thus account for less than 2 percent 
of all existing units. The spokesmen for condominium developers 
who testified before the Subcommittee indicated that the 80 percent 
pre-sales requirement and the provisions of the Davis-Bacon Act 
account, in part, for the limited utilization of Section 234. They also 
stated, however, that the major factor limiting wider utilization of 
FHA assistance is the requirement in Section 234(c)(2) that no 
mortgage on an individual condominium unit, located in a project 
containing 12 or more units, shall be eligible for 234 insurance unless 
the entire project is covered by an FHA insured project mortgage. 

This provision, of course, prevents FHA assistance in any large 
project which was originally constructed with conventional financing. 
The developers also pointed out that the provision results in delays 
and increased costs since FHA must process both the project mortgage 



12 



application and the individual unit mortgage application before insur- 
ing any unit mortgages in a given project. 

In response to a question from Mr. McKinney, Secretary Hills 
enumerated the reasons for this two-step processing procedure. The 
Secretary stated: 

First of all, we are required by statute to determine that the condominium 
is part of a project which may be covered by a project mortgage under the Na- 
tional Housing Act. You have to get the project within one of our statutory 
pigeonholes, and second, we have to determine that the individual owner is 
creditworthy. 

These are separate and distinct questions. But it is not duplicative processing, 
it is two-step. One, does the project comply with the statute? And then two, 
are the individual purchasers creditworthy and are they the kind of individuals 
for whom we should provide insurance of their loan? 

Simply by determining that the projects meet minimum property standards 
and that sort of thing does not uniformly mean that the taxpayers should insure 
the loan of every person. (Hearings p. 230). 

In her statement. Mrs. Hills indicated that the lack of wider utili- 
zation of section 234 can be traced to the stringent consumer protec- 
tion provisions outlined above, and the easy availability of commercial 
credit for condominium development in the early 1970's. 

The Subcommittee believes that the provisions of section 234(c) (2) 
have been an impediment to wider utilization of FHA condominium 
mortgage insurance. We are not. however, prepared to recommend 
at this time that Congress amend this provision. We do recommend 
that HUD carefully evaluate section 234(c)(2) to assess its utility 
in light of the goals of the National Housing Act. 

2. Veterans Administration Financing 

The Veterans' Administration also guarantees mortgages on indi- 
vidual condominium units. Through March 1976, the Veterans' Admin- 
istration had guaranteed the mortgages on approximately 5.400 
condominium units. Unlike section 234, however, the Veteran's Hous- 
ing Act of 1974 authorizes the guarantee of loans to acquire individual 
condominium units without the prerequisite that the entire project 
has been insured by HUD/FHA. The unit, however, must be in a new 
condominium development or in a structure originally built as a con- 
dominium project. 

3. Secondary Market Agencies 

The Federal National Mortgage Association (FXMA) and the 
Federal Home Loan Mortgage Corporation (FHLMC) provide a 
secondary market for condominium mortgage loans. FXMA's condo- 
minium program is centered around its prior approval service. A 
mortgage seller who has been approved by FXMA may seek prior 
approval of a condominium or PUD project by submitting an appli- 
cation to secure FXMA's certification. If prior approval is granted, 
a seller may submit mortgages on the individual units in the project 
for sale under FXMA programs. 

Approval is granted only when FXMA's review of the project and 
individual unit documentation shows that the Association's interest 
as a mortgagee and the interest of the home owner are adequately 
protected. Therefore, like the Federal Housing Administration, 
FXMA requires that stringent construction and consumer protection 
standards be utilized before granting prior approval. To date, FXMA 



13 



has received applications for prior approval on 127 condominium proj- 
ects representing 20.200 units, and 167 PUD projects representing 
32,108 units. Of these, FNMA has granted final approval for unit 
mortgage deliveries of 32 condominium projects representing 2,578 
units, and 56 PUD projects representing 6.2 <0 units. 

FNMA also administers programs to purchase FHA insured multi- 
family project mortgages. FXMA will purchase either project moil- 
gages insured pursuant to section 234: of the National Housing Act or 
individual unit mortgages in such projects. Unit mortgages must be 
insured under section 234 or 235 (i) of the National Housing Act or 
guaranteed by the VA under section 1810. chapter 37 of title 38, 
United States Code. The unit mortgages may be delivered pursuant 
to either blanket project commitments or single-family commitments. 
Such mortgages are also currently eligible for purchase by the Gov- 
ernment National Mortgage Association (GNMA) under its program 
23. GNMA project mortgages are administered by FNMA. To date. 
FNMA has not purchased any Section 234 project mortgages. They 
have, however, as of December 31, 1975. purchased 6.254 Section 234 
unit mortgages, totaling 8100,791.292. FHLMC is also active in the 
purchase of condominium unit mortgages and had purchased about 
22.000 loans by the end of 1975. 

Projects insured under Section 234 of the National Housing Act 
are also eligible for construction loan advances under a program 
administered jointly by FNMA and FHA. Basically, this program 
authorizes FNMA to make loan advances not to exceed 95 percent of 
the amount of each FHA insured advance. To date. FNMA lias not 
participated in the construction financing of any Section 234 projects. 

4. Inter- Agency Task Force 

Secretary Hills informed the Subcommittee that HUD has orga- 
nized an inter-agency task force, the Committee for Standardization 
of Condominium Requirements, comprising all the federal and quasi- 
federal organizations associated with the financing of condominiums 
(FHA, FmHA, VA, FNMA, and FHLMC). The goal of this task 
force is to eliminate duplicitous or conflicting requirements and to 
make it easier for developers to utilize federally related financing 
programs. The task force is attempting to standardize the program 
requirements of the various organizations to allow for more rapid 
reviews and approvals. Mrs. Hills promised that HUD would proceed 
as quickly as possible to complete inter-agency negotiations and to 
implement the resulting task force recommendations. 

III. Recommexdatioxs 

Condominiums have been described as the best housing alternative 
available to Americans given the economic and environmental realities 
of the present time. Our stud}' revealed, however, that when condo- 
minium development is left unregulated, serious consumer problems 
arise which deprive the condominium owners of their exoectations of 
good and decent housing and curtail the construction of new condo- 
minium units. It is the Subcommittee's recommendation, therefore, 
that Congress enact legislation providing minimum standards for dis- 



14 



closure and consumer protection in condominium sales and conver- 
sions. Specifically, the Subcommittee recommends : 

1. The promulgation of federal minimum disclosure provisions to 
apply in the sale of all new and converted condominium units. 

2. Enactment of a u cooling-olF' period allowing the condominium 
purchasers to cancel their contracts within 15 days after the execution 
of a sales agreement. 

5. A requirement that all purchaser deposits be placed in a special 
escrow account, not to be utilized by a developer until owner 
occupancy. 

4. A one-year warranty against structural defects in new condomin- 
ium units and common areas, and a two-year warranty for converted 
units. 

5. The Subcommittee's proposals for minimum disclosure, a cool ing- 
ot!' period, and the escrowing of deposits should also be made applicable 
to the sale of units in planned unit developments. 

(>. A requirement that tenants be given written notice of not less 
than 1*20 days prior to being required to vacate their apartments in 
order to facilitate a condominium conversion and an option to pur- 
chase their apartments exercisable within 90 days of such notice. 

7. Enforcement of the above provisions would be left to apartment 
owners through individual or class actions in federal court. Attorney's 
fees should be recoverable by successful plaintiffs. 

8. State regulatory schemes that provide the disclosure and substan- 
tive protection outlined above would not be affected by the Subcom- 
mittee's proposed federal legislation, either in the interstate or intra- 
state sale of condominiums. The right to sue in federal court would 
merely represent an additional remedy for aggrieved consumers in 
these states. 

9. Current federal condominium-related activities should remain 

in effect. 

Discussiox 

A. CONSUMER PROTECTION 

As pointed out in the Subcommittee's "'Findings and Conclusions", 
the ma j ority of consumer problems are the result of purchaser un- 
familiarity with condominium housing. A large part of this problem 
can be overcome by requiring developers to disclose to prospective 
purchasers in a brief, easy to understand format, the information 
necessary to enable consumers to make a sound purchase decision. The 
majority of witnesses who testified before the Subcommittee agreed 
that a federal disclosure requirement would be an important step for 
the protection of condominium consumers. As James DeLong of the 
FTC stated : 

I think we have all focused on this. There is a general consensus that disclosure 
is the appropriate remedy here and probably the only remedy. (Hearings p. 253). 

Similarly, Secretary. Hills noted : 

The Department [of Housing and Urban Development] has endorsed national 
minimum standards for disclosure in the sale of condominium properties. Every 
effort must he made to enable potential condominium purchasers to rench an 
informed purchase decision, but Federal disclosure requirements should be held 
to a minimum. (Hearings p. 215). 

While disclosure is important, the Subcommittee believes that it 
is equally important that the information required to be disclosed by 



15 



federal legislation be limited to essential items, and be set out in clear, 
concise terms. Lengthy, complicated disclosure statements serve little 
purpose since they do* not enhance consumer understanding and may. 
in fact, be ignored by purchasers. In addition, developers would incur 
substantial expenses in preparing extensive disclosure documents and 
would undoubtedly pass these costs on to consumers. The Subcommit- 
tee agrees with Secretary Hills : 

Highly technical and voluminous disclosure statements are complicated, 
costly, and as we found during our study, often not read by the buyer. Accord- 
ingly, disclosure requirements should be limited to the provision of information 
essential to a prudent purchase decision. (Hearings p. 216). 

The Subcommittee on General Oversight and Renegotiation, there- 
fore, recommends that the developer be required to furnish the follow- 
ing information to all prospective purchasers : 

1. The name and address of the condominium project, and the name, address 
and telephone number of the developer and of the project manager or his agent : 

2. A general narrative description of the project stating the total number of 
units, a description of the types of units and price of each type of unit, the 
total number of units that may be included in the project, and a precise state- 
ment of the nature of the interest which is being offered ; 

3. A general disclosure of the status of construction, zoning, site plan, or other 
approvals, and compliance or notice of failure to comply with any other Federal. 
State, or local statutes or regulations affecting the project, and the actual or 
scheduled dates of completion of buildings, recreation facilities, and other com- 
mon elements : 

4. The significant terms of any financing offered by or through the developer 
to purchasers of the condominium units in the project, including the name of 
any bank or other institution involved in the financing, the minimum downpay- 
ment, and the interest rate : 

5. A brief description of any warranties for structural elements and mechan- 
ical and other systems, stated separately for the individual units and the common 
elements ; 

6. A two-year projection (revised and updated at least every six months) of 
annual expenditures necessary to operate and maintain the common elements 
of the condominium project, and a complete statement of estimated monthly cost 
per unit for such two-year period including — 

(A) the formula for determining each unit's share of common element costs : 

(B) the amount of principal, interest, taxes, and insurance, each listed 
separately ; 

(C) the dollar amount of operating and maintenance expenses; 

(D) the monthly cost of utilities: and 

(E) any other costs, fees, and assessments: 

7. A statement of significant provisions for management of the condominium 
project including — 

(A) conditions for the formation of an owners' association: 

(B) the apportionment of voting rights among the members of the 
association ; 

(C) any provisions concerning meetings and required notice thereof: 

(D) provisions for the activities of officers of the association and their elec- 
tion, duties, and functions; 

I E) the contractual rights and responsibilities of the owners' association ; and 

(F) the binding nature of any provisions of documents establishing or con- 
trolling the condominium project and the method of amendment of any portions 
relating to the owners' association : 

8. A statement of purchaser's right to review the condominium instruments, 
to void the contract, any conditions for the return of deposit, a statement about 
any present litigation concerning the condominium project, and the rights of 
purchasers to bring a civil action against the developer for failure to comply 
with federal requirements ; 

9. A statement of the extent of commercial or other nonresidential develop- 
ment in or near the condominium project and the potential effects of such devel- 
opment on the interests, rights, or obligations of the condominium unit owners : 

10. The existence (or requirement for the establishment) of a reserve fund 
to finance the cost of repair or replacement of common element components ; 



16 



11. The existence and terms of any lease of the project's common areas, with 
a clear, concise definition of an "escalation clause*' if such a clause is included 
in the lease ; and 

12. A clear, concise definition of all essential terms used in the disclosure 
statement. 

The Subcommittee believes that requiring the developers to provide 
the above information will not prove unduly burdensome, nor incur 
unnecessary costs to the consumer. The costs of such disclosure would 
be minimal since all the required information is readily available to 
the developer. In addition, the Subcommittee concurs in the views of 
New York State Assistant Attorney General, Arthur Levine: 

The evidence is quite clear that the nation's ability to construct and market 
housing is not deterred by full disclosure and is often enhanced. . . . Disclosure 
helps and protects the real estate industry by establishing a climate of honesty 
so that competition does not descend to the level of liars and cheats. By adher- 
ing closely to the promises contained in the disclosure document, unnecessary 
litigation involving allegations of fraud and misrepresentation can be substan- 
tially reduced or eliminated. (Hearings p. 84). 

The Oversight Subcommittee believes that minimum federal dis- 
closure, when coupled with the educational programs administered 
by HUD's Office of Consumer Affairs and Regulatory Functions, will 
prove highly effective in protecting condominium buyers. We also 
believe that certain substantive measures are necessary to insure ade- 
quate consumer protection. To prevent the loss of purchaser down- 
payments and deposits in the event of developer bankruptcy, it is rec- 
ommended that federal legislation require all such payments to be 
held by the developer in a special escrow account. This provision would 
effectuate the general expectation of the parties to the sale, without 
incurring substantial additional costs to the developer. 

The Subcommittee also recommends that federal legislation pro- 
vide the purchaser w T ith the right to cancel his sales contract within 
15 days after its execution. As Secretary Hills explained : 

A "cooling-off" period allows the consumer to review disclosure materials and 
to consider carefully his purchase decision. . . . The "cooling-off' period avoids 
the developer having to provide extensive disclosure materials to every individ- 
ual inquiring about a unit. It is far more efficient to require that materials 
be given only to serious purchasers but to allow them time for careful review 
of those materials during a cooling-off period. (Hearings p. 208). 

As discussed in the "Findings and Conclusions" section of this 
report, poor quality condominium construction is particularly hard to 
discover and remedy, especially in high rise structures. For this reason 
the Subcommittee recommends that the federal government require 
developers to provide a one-year warranty against structural defects 
in each of the units and in all common elements. For converted struc- 
tures, a two-year warranty should be required. 

The provision of a warranty will possibly result in a marginal 
increase in the price of a condominium unit. It is believed however, 
that on balance the benefits to purchasers of having protection against 
unexpected costs stemming from a major structural defect justifies a 
limited warranty requirement. 

The Subcommittee believes that planned unit developments present 
the same potential for purchaser confusion and dissatisfaction as do 
condominiums. We therefore recommend that our proposals for min- 
imum disclosure, a cooling-off period, and the esc rowing of deposits 
and downpayments be made applicable to PI T Ds. Since most housing 



17 



in PUDs is of the single family detached variety, detecting and rem- 
edying structural defects does not present the problems it does in 
multi b unit condominiums. The subcommittee does not therefore, be- 
lieve that warranties should be federally mandated m the sale ot units 
in PUDs. 

B. ENFORCEMENT 

Condominium development, like most real estate development, is 
primarily a matter of local concern and responsibility. It is not, there- 
fore the Subcommittee's intent to oust state jurisdiction over this area, 
nor to disrupt already existing state regulatory machinery. It is be- 
lieved, however, that "federal protection is necessary m those States 
which have not yet enacted condominium legislation. Moreover, while 
some type of disclosure is an integral aspect of all existing state con- 
dominimum consumer protection statutes, not all of these statutes 
require warranties, cooling-off periods, or the escrowing of deposits. 
In states which do not provide these safeguards, the subcommittee's 
recommendations would provide substantial additional consumer 
protection. 

Our belief that the States have primary responsibility in this area 
is one reason we are recommending that enforcement of federal stand- 
ards be left to individual condominium owners through the creation of 
a federal cause of action. This enforcement mechanism would permit 
the states that currently regulate condominiums to continue their 
own programs unhampered by a conflicting or duplicitous federal 
enforcement scheme. In states which provide protection similar to or 
greater than the Federal act, litigation in Federal courts would simply 
provide an additional remedy. 

The federal disclosure provisions would also apply to the solicita- 
tion of condominium sales across state lines. Here again, the Sub- 
committee believes that states washing to provide greater protection 
for their citizens from interstate solicitations be permitted to do so. 
The federal provisions recommended by the Subcommittee would, 
therefore, supplement and not supplant state regulation of both intra- 
state, and interstate condominium sales. 

The Subcommittee believes, moreover, that private federal litiga- 
tion would provide more than sufficient protection for consumers in 
States having no condominium consumer legislation, or whose protec- 
tion schemes are more limited than our recommendations for federal 
action. As James DeLong told the Subcommittee : 

The FTC staff's view, if one could develop decent disclosure statements that 
require the developers to set out the basic situation into which the purchaser 
is getting and that points out the obvious traps that exist, and that creates rights 
to bring some type of class action for rescission, or other appropriate redress, it 
would go a long way toward solving this problem, and solving it without getting 
into all the complications of elaborate Federal regulations. (Hearings p. 253). 

The Oversight Subcommittee believes that the measures outlined 
above are sufficient to protect consumers and are, in fact, the only 
appropriate federal response at the present time. Proposals for a more 
extensive Federal role, such as reouiring HUD registration of all con- 
dominium projects or regulating the specifics of condominium manage- 
ment and control, might provide marginally greater protection to the 
consumer. On balance, however, the delays inherent in an extensive 
regulatory scheme, and the increased costs to government, developers. 



18 



and consumers, outweigh these advantages and argue against a more 
comprehensive scheme of condominium regulation. 

In the course of the Subcommittee's hearings in Florida, the view 
was expressed by numerous witnesses that the federal government 
should prohibit long-term recreation leases, and declare existing leases 
void ab initio. The Subcommittee has given careful consideration to 
these proposals, but believes that such measures are not warranted at 
this time. Although the recreation lease concept has undoubtedly been 
abused in Florida, it is potentially an extremely beneficial device for 
individual condominium owners. By means of recreation leases, devel- 
opers of large condominium projects are able to provide a wide range 
of recreation facilities at a lower cost than would otherwise be possible. 
Insuring that the purchaser is aware of and understands the implica- 
tions of long-term recreation leases would provide adequate safeguards 
against recreation lease abuses, while retaining an individual's flexi- 
bility to purchase in a project offering recreation leases if he or she 
deems it best. 

The Subcommittee similarly declines to recommend legislation that 
would attempt to void existing recreation leases. Such legislation would 
almost certainly be held by the courts to be a violation of the Con- 
stitution's Due Process Clause. In any event, litigation of this issue 
could be expected to take many years, during which time efforts of 
condominium owners to reach other solutions would be curtailed or 
hindered- Florida, the state where recreation leases are mainly found, 
has recently declared recreation leases to be against public policy. 
Federal legislation dealing with this same issue would not add signifi- 
cantly to the relief available to Florida condominium owners under 
this state provision. FTC litigation appears to be the only appropriate 
federal response to the serious problem of existing long-term recrea- 
tion leases. 

C. CONVERSIONS 

The decision whether to regulate the conversion of rental apartments 
into condominiums is one that properly belongs to the jurisdictions 
directly affected. Based upon a locality's individual situation and cir- 
cumstances, state and local governments must decide whether to foster 
or inhibit the conversion process. The Subcommittee does not believe 
that it is appropriate for the federal p;overnment to involve itself in 
this decision making process. The federal government can, however, 
provide substantial protection to tenants by mandating that landlords 
provide written notice of their intention to convert 120 days before 
requiring tenants to vacate the premises. Tenants should also be given 
a 90-day right of first refusal to purchase their own apartments. These 
measures would not significant] v interfere with what is basically a 
local decision. 

D. CURRENT FEDERAL INVOLVEMENT 

The Subcommittee agrees with SEC spokesmen that unless a scheme 
of federal regulation were enacted which specifically addressed the 
problems of investment as well as residential condominiums, the juris- 
diction of the SEC should remain unimpaired. Since our recommenda- 
tions contain no special provisions dealing with condominiums as in- 
vestments, the Subcommittee does not recommend that the SEC's role 
in this area be changed. Similarly, the limited nature of the consumer 



19 



protection measures recommended by the Subcommittee argues in favor 
of allowing the Office of Interstate Land Sales Registration to continue 
its condominium registration program. 

As previously pointed out. an interagency task force, comprised of 
all federal and quasi-federal agencies involved with the financing of 
condominiums, is currently attempting to formulate new financing pro- 
cedures to eliminate conflicting and duplicitous requirements and to 
make it easier for developers to utilize Federal programs. Pending the 
results of the task force r s efforts, the subcommittee recommends that no 
changes be made in Federal financing programs. 



ADDITIONAL VIEWS OF CONGRESSMEN GEORGE 
HANSEN AND JOHN H. ROUSSELOT 



The undersigned Minority Members of the Subcommittee find the 
Report on Condominium Development and Sales Practices to be gen- 
erally useful and accurate, but we believe it is appropriate to make the 
following observations : 

1. The Report notes that condominiums are a "highly regional 
phenomenon." with .50 percent of development occurring in Florida. 
California, and New York and 70 percent occurring in the ten most 
active states, according to estimates provided by HUD. All of these 
states have already enacted legislation to regulate condominium devel- 
opment, and some already have "second generation" statutes. The 
highly regional nature of condominium development and the fact that 
the states most directly affected have enacted condominium statutes 
indicate that there is little justification for federal intervention, except 
for the area of interstate sales, where extension of disclosure provisions 
governing interstate land sales to cover condominiums would seem to 
be in order. 

'2. We were impressed by the indication that policies of local gov- 
ernments and of the federal government create artificial incentives for 
owners of rental apartments to convert their properties to condo- 
miniums, with the result that some residents experience considerable 
hardship due to the expense and inconvenience of forced relocation. 
Policies contributing to owner abandonment bv means of condominium 
conversions include rent controls, high real estate taxes, and the avail- 
ability of income tax deductions for mortgage interest payments 
associated with condominium ownership. 

3. The provision of a 15-day "cooling-off" period for condominium 
sales seems to constitute an attempt by the Subcommittee to write con- 
tracts for condominium purchasers which may limit choices available 
to condominium purchasers in an arbitrary manner reminiscent of the 
original Real Estate Settlement Procedures Act (RESPA). 

With respect to the proposed warranties of one year for new condo- 
miniums and two years for converted units, we see no justification for 
demanding a longer warranty on an existing, converted structure than 
on a totally new one. 

4. Finally, we find ourselves in complete agreement with the state- 
ment that, "Condominium development, like most real estate devel- 
opment, is primarily a matter of local concern and responsibility." 
We therefore agree, as well, with the desire of the Majority to avoid 
establishment of an additional layer of bureaucratic machinery to reg- 
ulate condominiums. However, it is not at all clear that the provision 
of a federal cause of action as a means of enforcing federal standards 
is consistent with the stated concern. 

The Report states that. "This enforcement mechanism (a federal 
cause of action) would permit the states that currently regulate condo- 

(21) 



22 



illiniums to continue their own programs unhampered by a conflicting 
or duplicitous federal enforcement scheme. In states which provide 
protection similar to or greater than the federal act, litigation in fed- 
eral courts would simply provide an additional remedy." 

It is easy to lose sight of the very real possibility that a separate 
federal remedy administered by an existing agency (the federal court 
system) can be as "conflicting*' or "duplicitous'- in its effect as if an 
entirely separate agency were created. Moreover, the apparently simple 
expediency of creating a right to sue in federal court will add to the 
burgeoning growth of the case load in the federal courts. The interests 
of the Subcommittee in recognizing the primary responsibility of the 
states to regulate condominium development and in minimizing dupli- 
cation of state and federal enforcement efforts can best be served, in 
our judgment, by confining federal enforcement efforts to such areas 
as interstate condominium sales where there is clearly a substantial 
federal regulatory interest. 

George Hansen, 
John H. Kousselot. 



Appendix 



As pointed out in the report, 10 States account for more than 70 percent of 
all condominium development in the United States. The following: table indicates 
whether these States have enacted consumer protection provisions similar to 
those recommended by the Subcommittee on General Oversight and Renegotia- 
tion. In the remaining; States, consumers generally enjoy far le^s protection 
than in the jurisdictions listed on the chart. A more detailed chart providing a 
comprehensive review of condominium-related statutes in all 50 States, the 
District of Columbia, and Puerto Rico is contained in Volume I of the Depart- 
ment of Housing and Urban Development's '•Condominium/Cooperative Study."' 



(23) 



24 



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